Question

In early January 2017, NewTech purchases computer equipment for \(154,000 to use in operating activities for the next four years. It estimates the equipment’s salvage value at \)25,000. Prepare a table showing depreciation and book value for each of the four years assuming straight-line depreciation.

Short answer

The salvage value at the end of 4 years is $25,000.

Step-by-step solution

Straight-Line Method

A straight-line depreciation charges the same amount of expense to each period of an asset’s useful life. A two-step process is used. We first compute the depreciable cost of an asset, also called the cost to be depreciated. It is computed by subtracting an asset’s salvage value from its total cost. Second, a depreciable cost is divided by the number of accounting periods in an asset’s useful life.

Formula

$\mathrm{Depreciation}=\frac{\mathrm{cost}-\mathrm{salvage}\mathrm{value}}{\mathrm{useful}\mathrm{life}}.$

Computation of depreciation

$\begin{array}{rcl}Depreciation& =& \frac{\$154,000-\$25,000}{4years}\\ & =& \frac{\$129,000}{4years}\\ & =& \$32,250.\end{array}$

Years	Depreciable cost ($154,000-$25,000)	Depreciation expense	Accumulated depreciation	Book value
				$154,000
1	$129,000	$32,250	$32,250	$121,750
2	$129,000	$32,250	$64,500	$89,500
3	$129,000	$32,250	$96,750	$57,250
4	$129,000	$32,250	$129,000	$25,000 (salvage value)